Analysts split on Fannie-Freddie rescue plan

BANGALORE (Reuters) - Analysts were divided on the U.S. government's rescue plan for mortgage giants Fannie Mae and Freddie Mac, but they agreed the companies were under no pressure to raise immediate capital.

Merrill Lynch called the rescue plan a "double-edge sword," while Fox-Pitt said it was the "best of all possible outcomes" for shareholders.

Citigroup said it did not believe there was any real risk of a government takeover of Fannie and Freddie any time soon.

Merrill analysts said, "The mere possibility of direct investments in Fannie and Freddie suggests further caution, in our view, as the pieces are falling into place for institutional support at possible shareholder expense."

Goldman Sachs said the actions by U.S. regulators were needed in order to stem the risk of credit deterioration.

"If Fannie Mae and Freddie Mac were shrinking it would be hard to avoid this (credit contraction) situation," Goldman analysts wrote.

The U.S. Treasury Department and Federal Reserve on Sunday announced measures to lend money and buy shares if necessary in the two embattled mortgage lenders.

Shares of both companies soared in early trade, buoyed by the rescue plan, but quickly gave up most their gains and traded lower.

CAPITAL CHECK

Freddie and Fannie shares had plummeted more than 40 percent last week on fears the companies were undercapitalized and would require billions of dollars in additional capital.

However, analysts believe both companies are adequately capitalized, at least in the near term.

"Credit losses are likely to lead to capital erosion at both companies, however, each appears sufficiently capitalized for the next few quarters," Merrill's Kenneth Bruce said.

Analysts at Citigroup and Fox-Pitt also said there was no urgent need for new capital, with Fox-Pitt's Howard Shapiro adding "insolvency was never an issue."

The companies, which are shareholder-owned but also government-sponsored, had said they were adequately capitalized.

Since the crisis began, Fannie and Freddie have lost more than $11 billion and raised some $20 billion of capital.

BLEAK 2008

Several brokerages forecast a 2008 loss for both Freddie and Fannie. Analysts forecast 2008 losses in the range of 40 cents to $3.70 a share for Freddie and $3.50 to $4.15 a share for Fannie.

Merrill Lynch said both Freddie and Fannie would continue to incur rising losses for several years, with $72 billion in losses on existing portfolios.

Reversing its 2008 estimate on Fannie to a loss of $3.50, Citigroup said the revised estimate reflects the recent raising of $7.5 billion in capital and higher provisioning for losses.

For Freddie, however, Citigroup sees a smaller loss of $1.50 for 2008, saying the reduction reflects an expected $5.5 billion capital raise toward the end of the third quarter, offset by higher-than-expected recent retained portfolio growth.

Fannie and Freddie own or guarantee $5 trillion of debt, close to half of all U.S. mortgages.

Should these two government-sponsored enterprises default on their debt, losses would ripple throughout the U.S. and global financial system.

"Virtually every bank and thrift of size in this country owns some of this debt," Ladenburg Thalmann's Richard Bove said. Freddie Mac was down 6 percent at $7.33 in afternoon trade on the New York Stock Exchange, while Fannie Mae was down almost 2 percent at $10.08.

(Editing by Vinu Pilakkott and Mike Miller)